Technical Note—Consumer Choice and Market Expansion: Modeling, Optimization, and Estimation

Market size, measured by the number of people who are interested in products from the same category, may be largely influenced by assortment planning and pricing decisions. This effect is referred to as market expansion. In this paper, I incorporate the market expansion effects into consumer choice models and investigate various operations problems. In particular, I take the widely used multinomial logit model as a showcase to examine the market expansion effects on assortment planning and pricing, and propose an alternating-optimization expectation-maximization method that separates the estimation of consumer choice behavior and the market expansion effects to calibrate the new model. An empirical study on a real data set demonstrates the efficiency of the proposed estimation method and the importance of incorporating market expansion effects into consumer choice models. Failure to account for the market expansion effects may lead to substantial losses in demand estimation and operations management.